Professional Briefing –Business Valuation and other “Dark Arts”

15 December 2011

Administration

Admin

Timetable

Presenters…

Business Valuation and other “Dark Arts”

• Why of interest?– M&A– Investment– Other (but ignore)

• Dark Arts– Business valuation – Tax– Legal

• Practicalities– General guidance/ tips

• Q&A over breakfast

Securing the

“Best deal”

Business Valuation – “the basics”

Richard Wadman ACA

Corporate Finance Director

Francis Clark with Winter Rule

How much would you pay?

Business Valuation – some “basics”

► “The value of an asset is the value of the

cash flow it generates”

► Price = Value

► Business Valuation is subjective

► “Balance Sheet value” = Value (generally)

/

/

Value of an asset…

• Value of cash flows = Net Present Value

• Net Present Value (NPV) involves assumptions on:– Future cash flows

– Discount rate to be applied (“£100 now worth more than a £100 payable in the future”)

• Investment opportunities forgone

• Risk of non-receipt

• Example calculation

Valuation methods used

• Minority shareholdings– Dividend yield?– 100% value x % shareholding x Minority Discount

• 100% of a trading business– Earnings– Net Assets– Net Present Value – Discounted Exit Value– Economic Value Added

But all should be rationalised against ‘Value of an asset is value of its future cash flows’

The Tax Tale

Ian Pring CTA ATT

Senior Tax Consultant

Francis Clark

Tax tail…

• They say do not let the Tax tail wag the dog but a “valuation” needs to be considered in the context of…

– On a sale: Post Tax Receipt

– On a purchase: Post Tax cost

– On an investment: Post Tax cost

Purchaser: assets or shares?

Assets

Capital allowances

Goodwill amortisation tax relief

Capital gains rollover

SDLT (to 4%) on land & buildings

VAT payable – unless TOGC

Trading/capital losses not xfrd

Can choose assets to take + leave liabilities behind

Shares

No tax relief

No relief

No rollover unless EIS shares

SD at 0.5%

Exempt from VAT

C/fwd provided no major changes

Acquire company with liabilities –warranties, indemnities, guarantees, retentions, …

- Caveat emptor

Entrepreneurs’ Relief

Share disposal:

Throughout ‘relevant one year period’ individual must demonstrate that:

• Employee or office holder of company (or member of trading group)

• Own 5% of the ordinary shares AND exercise 5% of the voting rights

And be a trading company without substantial non-trading activities, i.e. >80% trading activity

Check all shareholders qualify or establish why not to avoid difficulties in due course!

Entrepreneurs’ Relief

Unincorporated business disposal:

1. Whole or part of the business where, at date of disposal:

– Business owned for at least one year, and

– Disposal comprises at least one ‘relevant business asset’, or

2. One or more relevant business assets where:– Each of assets in use in business at cessation, and

– Asset disposal within 3 years of cessation

Deferred Consideration

Ascertainable (= quantifiable):

If quantum of proceeds determined by events occurring by disposal date full proceeds taxed at disposal date with no discount for delay in receipt – even if receipt contingent on trigger event occurring after disposal date! (S28 TCGA 1992)

S280 TCGA 1992 – postponement (> 18 months)

S48(1) TCGA 1992 – amendment to original asst

Deferred Consideration

Unascertainable proceeds – where events affecting thequantum of proceeds do not occur until after thedisposal date

‘Chose in action’ – right to such unknown considerationvalued and taxed at disposal date

Any future payments resulting from right treated aspart-disposal of that right and create gains or losses inthe later tax year (S22 TCGA 1992)

Deferred Consideration - Unascertainable

Fred sells shares in A Ltd in 2010/11 for £800k with a further sum payable dependent on A Ltd’s results. Contingent right agreed to be worth £50k. Earn-out proceeds of £200k received in 2011/12. Taxed as:

2010/11 £850k @ 10% (ER due & ignoring cost + AE)

2011/12 £150k @ 28% (assuming HR taxpayer)

Structure to tax £1m in 2010/11 @ 10% (as ascertainable sum less contingent liability under S49 TCGA 1992)

Warranties & Indemnities

Warranty

Statement of fact made about the tax affairs of Target company which Buyer relies on when entering the contract:

• Damages

• Duty to mitigate loss

• Limited by disclosure

Payment from Seller to Buyer (S49 TCGA 1992)

Indemnity

Separately enforceable contract which reimburses loss and for which consideration is given:

• Debt (primary liability)

• No duty to mitigate loss

• Not (generally) limited by disclosure

A means of allocating the risk of an unforeseen tax liability between Seller and Buyer

Enterprise Investment Scheme (‘EIS’)

• 30% income tax relief shares issued on investments of up to £500,000 a year (to be increased to £1 million from 6 April 2012) - withdrawn if the shares are disposed of within 3 years

• Gains on the disposal of EIS shares are exempt unless the income tax relief is withdrawn

• Gains arising on disposals of any assets can be deferred against subscriptions for shares in any EIS company

• Shares do not have to have income tax relief attributable to them in order to qualify for deferral relief

• The deferred gain will become chargeable in the tax year when the subscription shares are disposed of

Business Valuation – “practicalities”

Richard Wadman ACA

Corporate Finance Director

Francis Clark with Winter Rule

Francis Clark with Winter Rule approach (Desk Top)

Equity value (100%) = Enterprise Value ADD Non-Trade Assets LESS Non-Trade Liabilities

Enterprise Value = ‘value of the trade’

(including working capital and P&M i.e., the ‘earnings generators’)

Enterprise Value

• Maintainable EBIT x Multiple

• Maintainable EBIT – EBIT per Accounts

– Adjust for Directors remuneration, rent on freehold, one-off and non-arms length transactions etc

– Weightings across 3 -4 years

• Multiple– Listed PER and apply marketability discount

– PERDA

Multiple trends…

Non-trade assets and liabilities

• Property

• Mortgage

• Directors Loans

• Cash

– Excess (add)

– “Commitments” (minus)

Sales €150,000

Loss €40,000

Invest €75,000

25%

Sales €2,000,000

Profit €200,000

Exit multiple 6x

Exit value €1,200,000

25% = €300,000

4 times return

4 years

Pricing (slide stolen from SWAIN presentation)

Implicit…

• Valuation basis– Going concern

– Arms length

– Ignore any Special Purchaser

• Subjective

• Negotiation = key element

• Emotive – Key the ‘end game’ in mind

– Know the deal breakers

Preventing ‘value seepage’ through proper legal drafting

Chris Wills, Associate/ 15 December 2011

Protecting ‘Value’

• There are two key elements to protecting value for a

seller/company/existing shareholder to consider:

– ‘maintaining’ value on paper

– ‘collecting’ value in practice

Maintaining the value

• caveat emptor

• the delicate balance

– warranties/indemnities

– disclosure

• attitude to risk:

– remove the risk and pay now

– keep the risk and potentially pay later

Collecting value: Payment on completion

• ‘Cash is king’

• less may be more

Collecting value: Deferred consideration

• Why is some consideration deferred?

– unable to calculate price on completion

• stock valuation

• completion accounts

– purchaser wants to ‘buy now, pay later’

• earn out

• unable to raise all funds now

• In the seller’s/company’s/existing shareholder’s interests?

– ongoing control

– security

Has value been protected?

• Has value been maintained on paper?

– depends upon negotiating strength and attitude to

risk

– full disclosure of areas of concern

• Can value be collected in practice?

– maximise cash on completion

– maximise reward for deferred element

– suitable controls/security for any deferred element

For further information please contact:

Chris Wills, Associate

Telephone: 01872 226992

Email: chris@murrellashworth.co.uk

www.murrellashworth.co.uk

Value?

Breakfast and discussion...

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